Rain, shine and rising prices: climate-related drivers of food inflation in India
The growing frequency and intensity of heat stress, excess rainfall, floods and storms may be reshaping the structure of food inflation. These trends challenge a long-standing assumption about inflation targeting: that supply shocks are temporary, idiosyncratic and short-lived. In India and other climate-vulnerable economies, central banks may find themselves managing a structural inflation environment with tools designed for a cyclical one.
This policy brief examines the mechanisms through which physical climate impacts transmit into rises in food prices at the subnational level in India, and then into headline and core inflation. The authors provide an empirical foundation for changes to forecasting frameworks, communication and the inflation-targeting architecture that the Reserve Bank of India (RBI) is already beginning to consider.
Core recommendations
The burden of price stability should increasingly be shared across different institutions, levels of government and policy domains. In this context, the RBI should:
- Incorporate climate variables, weather indicators and regional supply conditions into inflation projections.
- Consider stronger action and enhanced communication on inflation targeting if disturbances persist.
- Incorporate climate resilience into its Priority Sector Lending framework, aiming to direct concessional credit towards adaptation investment.
The central government and state governments should:
- Support effective price stability through coordination between monetary, fiscal and agricultural policy.
- Improve real-time data-sharing between the RBI, the Ministry of Agriculture, state governments and the Department of Consumer Affairs to help policymakers receive the information they need to respond to climate shocks.
- Invest in climate-resilient infrastructure, drought- and heat-resistant seed varieties, storage and refrigerated storage and transport, farmer advisory services that use climate and weather data, and early-warning systems that send out alerts before extreme climate events.
DOI: 10.21953/researchonline.lse.ac.uk.00138855